How to Position for a Commodities Supercycle

Inflation is a stubborn economic condition that can have a long-lasting impact on commodity prices. Commodities are the raw materials that feed, fuel, and shelter people worldwide. They are global assets that impact the global economy.

Commodity production is localized, occurring in regions where the climate supports output, or the geology presents rich reserves. Consumption is ubiquitous, as people worldwide depend on raw materials for survival.

I was born in 1959 when the worldwide population was below three billion. With over eight billion people inhabiting our planet today, production must keep pace with the expanding demand side of fundamental equations. Moreover, technological advances over the past decades have made demand increase exponentially.

Commodity flows depend on the ability to transport raw materials from producers to consumers. Wars, sanctions, and other logistical trade barriers complicate the supply chains.

While U.S. inflation has declined and is moving towards the Fed’s 2% target level, the central bank has said it will follow a more accommodative monetary policy path. In late 2024, the potential for a commodities supercycle that increases raw material prices is high. Commodity exposure could be the optimal path for portfolios over the coming years.

Commodity prices have been trending higher since the 2020 pandemic-inspired lows

• At above the $2,600 level, gold was over 80% higher than the 2020 low.
• At over $75 per barrel, NYMEX WTI crude oil was significantly higher than the 2020 low, when the energy commodity traded below zero for the first time. At around the $80 per barrel level, Brent crude oil was over 400% higher.
• At above $4.50 per pound, copper was over double the price at the 2020 low.
• Many raw materials reached record highs over the past four years and remain substantially above their 2020 low.

Falling U.S. interest rates support higher prices

• The U.S. Federal Reserve increased the short-term Fed Funds Rate from zero to a 5.375% midpoint from March 2020 through September 2024. The central bank also pushed longer-term rates higher through its quantitative tightening program to reduce its swollen balance sheet.
• The Fed began lowering its QT program in June and cut the Fed Funds Rate by 50 basis points in September 2024.
• Rising interest rates did not slow the ascent of most commodity prices.
• Falling rates tend to support higher commodity prices.

The erosion of the U.S. dollar’s role as the world’s reserve currency is bullish for commodities

• The bifurcation of the world’s nuclear powers, wars in Ukraine and the Middle East, sanctions, and retaliatory measures have caused the U.S. dollar’s role as the world’s reserve currency to decline.
• China and Russia are leading an initiative to roll out a BRICS currency with some gold backing to challenge the dollar’s role as the reserve currency.
• Saudi Arabia ended a fifty-year petrodollar agreement and is selling crude oil to China and India for payment in yuan and rupee, diminishing the dollar’s global role.
• Central banks have been purchasing gold, replacing dollar reserves with the precious metal.

The geopolitical landscape presents significant trade barriers

• Wars, sanctions, and tariffs create trade barriers.
• Commodities are global assets. While production is localized, consumption is ubiquitous.
• The dollar has been the pricing benchmark for commodities over the past decades.
• De-dollarization that diminishes the U.S. currency’s value is inherently bullish for dollar-based commodity prices.

The products that could follow commodity prices higher

• The diminishing role of the U.S. dollar on the global landscape and falling U.S. interest rates could be a powerful bullish combination for raw material prices.
• The DBC, PDBC, and GSG ETF products own diversified commodity portfolios.
• DBA is an agricultural commodity ETF. The DBB ETF owns a portfolio of copper, aluminum, and zinc.
• The GLTR ETF owns a gold, silver, platinum, and palladium portfolio.

The dollar’s diminishing role on the global stage and falling U.S. interest rates could ignite a commodities supercycle over the coming years. Markets reflect the economic and geopolitical landscapes, which remain bullish for commodities as the end of 2024 approaches.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!